Sebi begins probing Fortis Healthcare over fund diversion claims

Mumbai:Â Indiaâ€™s markets regulator has started a preliminary examination of the issues at hospital operator Fortis Healthcare Pvt. Ltd, including alleged instances of fund diversions, two people with direct knowledge of the matter said.

The Securities and Exchange Board of India, or Sebi, has written to the company seeking explanations on fund transfers to firms related to the promoters and the delay in releasing its fiscal-second quarter earnings, the two people, including a regulatory official, said on condition of anonymity.

A Fortis spokesperson in an email referred to communication to NSE that the company on Monday paid a fine of Rs65,98,890 to stock exchanges for non-submission of its second quarter results, and has sought more time for filing its second and third quarter results. It did not comment on Sebi writing to the company.

In a press conference on Saturday after the meeting of Sebiâ€™s board, chairman Ajay Tyagi had said the regulator was examining the â€śFortis issueâ€ť.

â€śWe have started a preliminary probe into the alleged governance lapses, violation of listing and disclosure regulations and fund diversion,â€ť said one of the two officials cited above.

Fortis Healthcare came under scrutiny after the transfer of Rs473 crore by its wholly owned subsidiary Fortis Hospitals Ltd to third parties, which were later re-classified as promoter entities.

Due to the change in shareholding and re-classification, the transaction was recognized as a related-party transaction, Fortis had informed the stock exchanges on 9 February. Under the Companies Act 2013 and Sebi listing norms, related-party transactions require separate approvals from shareholders and the board.

Considering that these companies were not related parties when the loans were sanctioned, a board nod was not sought. â€śSebi has sent queries to the company seeking explanations onÂ the fund movement that whether its is in normal course of business or not. In addition, the company is being quizzed on the delay in declaration of its financial results for the second quarter,â€ť said the second of the two officials cited earlier. He too declined to be named.

Fortis was supposed to consider the second quarter results on 14 November but in an exchange filling the same day, said it will inform the bourses about a fresh date of board meeting.

In a letter to National Stock Exchange of India Ltd (NSE) on Monday, Fortis said due to news reports of alleged fund diversions, the limited scope of its audit has widened. â€śOur conversations with our auditors indicate that the audit process will not be complete before the stipulated board meeting,â€ť said the company letter to NSE.

The nature of the transactions gives an impression that they were done to bypass regulations, experts said.

â€śThe company has admitted that yes, there is a movement of fund.Â What the company describes as investment in normal course of business could be siphoning of funds or diversionâ€ť said J.N. Gupta, co-founder and managing director of Stakeholder Empowerment Services, a proxy advisory firm.

In a report published on Monday, SES called Fortis aÂ â€śpersonal fiefdomâ€ť of promoters.

â€śIt appears that if what is alleged is true, it would mean that despite all regulations, effort to improve governance and vigil, few in India Inc would continue to treat a public listed company as private property. Ingenious transactions are invented and resorted to bypass regulations,â€ť the report said.

By bypassing regulations, SES meansÂ that Sebi norms require a shareholder approval for related transactions but not for transactions that later become related.

The company board will meet on 13 February amid regulatory troubles and cash flow issues. The board is expected to focus on diagnosing cash flow problems, a person aware of the developments said, requesting anonymity.

â€śCash reserves can smooth out the ebbs and flows of the expense cycle and enable the company to operate the hospitals without cash flow problems,â€ť said the person cited above.

The six-member board also has to name a managing director. Malvinder Mohan Singh served as Fortis Healthcareâ€™s executive chairman and his brother Shivinder Singh was the non-executive vice-chairman before they stepped down on 8 February, said the company in the letter to exchanges.

Vijay Pal Dalmia, a senior litigator and partner at law firm Vaish Associates, said the brothers can be tried under provisions relating to cheating and breach of trust if the allegations are true.

â€śCriminal law can be invoked under the Companies Act and the IPC (Indian Penal Code). They were acting as trustee of the company. There is a bona fide relationship between the company and the custodian of shareholders. They cannot escape the liabilityâ€ť.livemint